Independent Dealers

Gaining a Competitive Edge with Used Vehicle Acquisitions

It doesn’t look like we’ll see the job of acquiring the right used vehicles for a dealership getting any less challenging in 2015.

In fact, for some dealers, the coming year may be even more challenging. Forecasts say we’ll continue to see tight competition among dealers for wholesale vehicles, as more turn to auctions to build used vehicle sales volumes, cash flow and dealership net profits. This means there will be greater pressure to find the right cars at the right price — and more temptation to raise the hand at auction even though a unit may not make financial sense for a dealership.

In this environment, it’s super critical to have an edge over the other guy — to know exactly which cars to pursue, where to find them and what wholesale price to pay that will yield a sufficient margin and ensure acceptable profitability at retail. In addition, the dealers who become more efficient and proficient at honing and sustaining this competitive edge — what I refer to as Provisioning inventory — will fare better than others.

The following are some of the best practices for Provisioning inventory that I’ve seen from dealers who have committed themselves to working smarter (not necessarily harder) to acquire the right used vehicles and sharpen their competitive advantage as retailers:

Understand supply and demand dynamics for every vehicle on your buy list.

It’s still common for dealers to look at their store’s past history to determine the type of vehicles they should acquire to replenish their inventories. This analysis is useful but only to a point: What if a unit has lost its allure with buyers? What if there’s a different vehicle that sells faster or has seen a recent surge in demand? What if that black 2009 Chevy Malibu is a dud unless it has leather seats and Bluetooth? These are the questions dealers should be asking as they build their buy lists. To obtain the answers, dealers are turning to technology and tools that accurately detail the supply and demand characteristics of every vehicle they might acquire, down to equipment and trim. In some instances, the technology and tools can also map a retailing strategy that complements the supply and demand characteristics for a specific vehicle.

Know your margin before you acquire.

There’s a direct correlation between the supply and demand characteristics for a specific vehicle and its gross profit potential. For example, if there are a lot of the same, identically equipped units for sale in a market, chances are its gross profit potential is lower than units with greater scarcity. A unit’s retail profit potential is a critical component of a smart inventory acquisition strategy — how else can you know the maximum amount to pay at wholesale to acquire a unit? Here again, technology and tools offer the insights dealers should be using to avoid overpaying for a unit and ensuring they follow the age-old “You make your money when you acquire a vehicle” axiom. This insight is especially critical in today’s marketplace, where the pressure to acquire inventory can translate to “raising your hand” and paying too much.

Avoid fishing trips.

In past years, it was OK to go to an auction with a buy list and look for the vehicles that fit. In today’s environment, that’s almost guaranteed to be a waste of time, especially when other dealers have already scouted auction run lists from their stores to determine if it’s worth a buyer’s time to show up on a given day. When they do go, these buyers know the specific vehicles and run times, and they’ve already researched the cars and determined if it’s worth their time and effort by the time the bell rings.

Acquire online.

This is a corollary to the best practice above. Many dealers today now employ in-store inventory specialists and buyers who spend their days finding, bidding on and buying vehicles via online auctions. In fact, for some dealers, these online outlets have completely replaced physical auctions as a more efficient way to source used inventory. A benchmark: Most dealers should be acquiring at least 30 percent of their used vehicle inventory through online outlets to drive acquisition efficiency.

Map your exit strategy.

In the past, when dealers acquired a used vehicle, their exit strategy was simple: Apply a standard markup and wait for the right buyer to show up. Many dealers today have recognized this is too ham-handed for a marketplace that requires more precision. These dealers, armed with data that help them understand supply, demand and profitability potential on specific units, know exactly how they plan to price and retail a unit before they’ve even acquired it. Further, they even know the kind of action they can expect on a vehicle — such as average daily vehicle detail page (VDP) views — to monitor whether the unit’s performance meets their expectations. If it doesn’t, these dealers can quickly adjust elements of their exit strategy (e.g., asking price, descriptions, photos, etc.) to respond to the market feedback.

In a future column, I’ll address the best practices dealers deploy in their dealerships to sustain their competitive advantage from post-acquisition to vehicle delivery. In the meantime, the words of former General Electric CEO Jack Welch offer a fitting close: “If you don’t have a competitive advantage, don’t compete.”